Murphonomics - The Aggregate Demand and Aggregate Supply model

As economists we want to be able to model what is happening in an economy- particularly the macroeconomy. This enables us to analyse what causes changes in the economy at macro level and to therefore develop appropriate policies to achieve our macro goals;

Macroeconomic objectives/goals

Governments are usually aiming to:

Maintain high levels of employment or perhaps even full employment.
Maintain price stability- low and consistent levels of inflation
Keep medium to long term balance between imports and exports
Maintain high levels of economic growth
Reduce income inequality

One of the most common theoretical frameworks for analysing the marcroeconomy is aggregate demand and supply. Aggregate means total- we are now looking at the total demand and supply in a whole economy instead of an individual market.

What is the difference between the AD/AS model and the demand and supply model?

MICRO Looks at a particular market- e.g. sunglasses versus MACRO Looks at the economy as a whole
MICRO Equates price and quantity versus MACRO Equates the price level with the level of real output
MICRO Indicates microeconomic equilibrium where D=S versus MACRO Indicates macroeconomic equilibrium where AD=AS